Voting for Jeremy Corbyn as leader is a gut reaction to Labour’s electoral defeat. Corbyn does point to some real economic problems facing Britain but his policies are based largely on the kind of wishful thinking that is endemic in UK politics and both blights Labour’s past. His popularity lies in Labour’s failure to defend its own record in government. The party needs to learn from its successes as well as its evident recent failures if it wants to re-build, writes John Van Reenen.
Back in the summer of ‘83
In 1983 I was in the passenger seat of our Morris Marina touring the London suburb where I grew up. My father had never been so politically excited before. Our entire car had been transformed from its natural dull Pistachio Green to a lurid bright yellow, being plastered by posters of Labour’s Manifesto.
Through the loudspeaker bolted precariously on my side window, my Dad belted out his support for the nationalisation of the commanding heights of the economy, the restoration of union power and Unilateral Nuclear Disarmament. Sadly for him, Michael Foot was trounced in the elections with Labour’s share collapsing by 9.3% from 1979 – only 700,000 above the Alliance of the SDP who split from Labour as it veered leftwards and the Liberals. Indeed, Gerald Kaufman’s subsequent labelling of the manifesto as “the longest suicide note in history” was apt. Our car’s suspension gave up the ghost during the campaign and had to be toed off. Our Marina collapsed as catastrophically as the Labour and its manufacturer, the state-created British Leyland.
Observing Corbymania has re-kindled fond memories for those heady pre-election days. The Left was ascendant and like today, the analysis was that Labour had been too timid in power. Despite having won three (or four if you include the two in 1974) elections in the 15 years prior to Margaret Thatcher’s 1979 victory, the party was deeply unhappy. If only the flame of socialism could burn brighter the workers would shed their false consciousness and come to see the truth in battling big business.
Alas, things did not turn out that way and the Labour party spent the next 14 years in opposition re-building itself intellectually and politically into an effective force.
Corbynomics
Unlike most commentators I have actually read Corbyn’s “The Economy in 2020” as well as the 1983 manifesto. Corbyn’s document has several major advantages. First, at 8 pages it is much shorter and second, it does not (yet) commit the UK to leaving the European Union (a very silly idea).
Indeed, Corby-nomics strikes many of the right notes. Low productivity is holding down wages and inadequate infrastructure in housing, transport and energy is, in turn, depressing productivity. This resonates with my findings in the LSE Growth Commission.
But what is the solution? Mandating the Bank of England to make these investments through “people’s quantitative easing” makes no institutional sense to me. The Bank’s remit is to keep inflation under control not deal with the problems of under-investment in particular areas. By increasing its burden and politically interfering with its main role, the Bank’s independence will be undermined. Developing independent institutions like the Bank was a major achievement of Labour, ending the political manipulation of interest rates that had been a feature of previous governments. Labour created robust institutions to help determine NHS drug choice (NICE), minimum wages (Low Pay Commission) and migration levels (MAC) based on evidence and expert advice instead of political whim. The undermining of these innovative institutions since 2010 is plain wrong.
The financing of new public investment is to come from ending the “huge reliefs and subsidies on offer to the corporate sector” which apparently come to £93bn. I have little idea as to how this number is arrived at. Presumably, it includes the £1bn of tax reliefs to Research and Development that were introduced by Labour in 2000 and that I and others have shown to have helped increase innovation and productivity.
Similarly there is apparently £120bn of tax revenues that the government has forgotten to collect that can easily be magicked up by employing a few more tax collectors.
This is the kind of wishful thinking that all parties indulged in during the election campaign. The Tories promised to raise £5bn through reducing tax fraud, Labour pushed this to £7bn and the Liberal Democrats upped the ante to £10bn (the Greens win the prize by promising to get £30bn). Of course more can and should be done to reduce avoidance. But pretending this is easy allows politicians to avoid the harsh reality of spelling out where the money is coming from if you want to pay for increased spending. Just as I predicted before the election, the Chancellor whacked up taxes after the election because the Office of Budget Responsibility (OBR) rightly refused to believe his forecasts about reduced tax avoidance.
Just to be clear, I have no objection per se to a National Infrastructure Bank to reduce risk and boost investment. Indeed, when I co-chaired the LSE Growth Commission we advocated the creation of such an organisation alongside an Infrastructure Commission (which was in Labour’s 2015 manifesto). But tying it to the Bank of England, dressing it up as QE and pretending it can be funded from reducing tax avoidance is unnecessary, disingenuous and harmful.
Labour’s economic record: growth and equality
There is a deep ambivalence in the party over the New Labour years. Obviously for Tony Blair this is deeply tied to Iraq. But on the economic side, the 1997-2008 period was one of strong economic performance. UK national income per person had been falling behind the US, France and Germany consistently since the mid-Nineteenth Century, but for the three decades preceding the global financial crisis Britain reverse a century of relative decline. This success was rooted in both improved productivity and higher employment rates.
This economic success was built on reducing the power of monopolies (like the 2002 Enterprise Act), ensuring flexible labour markets (such as Labour’s New Deal for Young Unemployed and Job Centre Plus), boosting years in education, and supporting innovation (e.g. increases in the Science budget).
The major difference after 1997 was how the fruits of GDP were used. Inequality shot up under in the 1980s, yet from the mid-1990s the income differences between the top and bottom 10% narrowed significantly (see Figure 3 here). This was due to policies such as the introduction of the first national minimum wage in 1999 and generous increases in benefits and tax credits especially for working families. Increased spending on health and schools also disproportionately benefited the least well off.
These reductions in the inequality amongst the vast majority if people are overlooked by many in Labour’s left who focus obsessively on the top 1%, whose share of income did indeed rise under Labour. The main reason for this increase was the financial sector: two thirds of the increase in the share of the top 1% were simply due to bankers’ bonuses.
Without doubt, Labour’s biggest economic policy failing was poor financial regulation. This contributed to the rise in extreme inequality and to the financial crisis in 2008. Of course, this was a worldwide collective failure of regulation. And don’t forget that the gains in productivity prior to the global crisis were mainly outside finance – only 14% of the increase in output per hour between 1997 and 2007 was because of financial services.
The period since 2008 has been an unhappy time – the slowest recovery from a recession this century accompanied by 10% cuts in real wages from 2008 to 2014. The disastrous decision to accelerate austerity in 2010 under the Coalition, especially the 40% cut in public investment, unnecessarily prolonged the pain.
Labour was ineffective in attacking the government’s austerity record. The fact that in hindsight slightly larger budget surpluses should have been run during the pre-crisis period has been turned into the mantra of Labour’s “out of control” public spending both causing the crisis and being the reason for accelerated fiscal consolidation. This is simply absurd and has been thoroughly debunked.
Part of the problem was that Labour was reluctant to highlight its rather sensible pledge to eliminate the current deficit by the end of the next parliament. Instead of being proud to say that public investment should not be included in plans for eliminating the deficit as capital spending has a longer term return than current spending, it prevaricated out of fear of looking fiscally irresponsible.
What the future holds
New Labour’s sheepishness in defending its record had allowed the Corbynistas to make all the running. The Corbyn economic plan doesn’t want any commitments to eliminating the current deficit. The hard won successes of the post 1997 period are to be reversed with increases in union power and public ownership. “Tax justice” is the answer to most problems – soaking the rich.
Voting for Corbyn is gesture politics. It makes many on the left feel good about themselves and avoids the painful task of re-thinking policies and reconnecting beyond the base to the rest of the electorate.
It is a howl for the past rather than a serious fight for the future.
John Van Reenen is Director of the Centre for Economic Performance at the London School of Economics.
Voting for Corbyn is gesture politics. It makes many on the left feel good about themselves and avoids the painful task of re-thinking policies and reconnecting beyond the base to the rest of the electorate.
Try reading this
It corrects most of the mistakes in this article
http://www.taxresearch.org.uk/Blog/2015/08/30/corbynomics-four-weeks-on/
This is a good contribution to the debate, however I think the Foot comparison is unfair to Foot and Corbyn and overly favourable to Brown and Miliband.
Labour approval did plummet from the previous election to 27.3% but as noted here there were other factors at play other than Foot’s swing to the left and the Tories’ share fell by 1.5 percentage points (not %…). Indeed the share of Labour’s vote in the election was only marginally below Brown’s in 2010 (29%) and Miliband (30.4%). Obviously the FPP system being unkind as it can be at times Labour lost over 50 seats. But people talk about Foot like he was an absolute disaster. If that’s the case then Brown and Miliband should be in the same breath on a vote share basis. And if Corbyn is seen to be an electoral nightmare then those too should also be invoked rather than a lazy ‘Corbyn is Foot 2.0’ narrative.
I’m not a Corbyn fan but the other three are just as unelectable as him. The only difference is that he has put forth actual policies that can be scrutinised (and deservedly so) whereas the others have offered platitudes and vague language.
The potential Bank conflict was the bit that leapt out at me as needing more work. I seem to recall that we more-or-less owned a couple of banks a while ago – we’ll doubtless get another one before too long, so let’s use that instead of flogging it off for a pittance and lumbering the BoE with a task for which it’s ill-designed.
Financial regulation? Well it was pretty poor, but it seems to me that New Labour’s biggest domestic failure was taxing insufficiently: I’m not talking about squeezing anybody till the pips squeaked, just keeping up with spending that itself wasn’t rising spectacularly. That could have cooled down the speculative bonanza and done part of regulation’s work. But no, we just got low-tax good times when we needed them like a hole in the head. Focusing on spending just addresses the Tory agenda: there’s a case to be made that paying for it can actually be good for you and might have saved us a lot of pain in the longer term.
I’m aware this might sound economically illiterate, given that I didn’t study the subject, save for some political economy classes, but surely another way of looking at New Labour’s economic success is that it’s rooted in the century of decline experienced prior to it.
If the UK was experiencing falling income-per-capita relative to those states mentioned since the mid-19th century then might it be possible that states such as the USA, Germany and France may have experienced a similar downward trend much later than ourselves, thus making New Labour’s economic gains partly a result of a natural economic trend relative to the three states mentioned?
That’s essentially my only question about an otherwise informative and interesting article.
“Corbyn’s document has several major advantages. First, at 8 pages it is much shorter and second, it does not (yet) commit the UK to leaving the European Union ”
To be fair, leaving the EU was a necessary part of Labour’s 1983 manifesto – without that, most of the economic policies proposed would simply have been impossible to implement. If Corbyn does not follow suit it means that he simply has no intention of doing any of the things which he’s said he’d do, or perhaps even more worryingly, no care for the practical issues that a government needs to be able to handle in getting its policies enacted – even Miliband’s much softer left policies would have been fraught with implementation problems due to EU law and Corbyn’s proposals go much further.
https://botzarelli.wordpress.com/2015/06/15/beware-of-what-you-wish-for/
The negatives to Brexit set out in the paper the article linked would certainly come true if a post-exit UK took a 1983-type turn but I think are overstated otherwise (there’d be no real prospect of tariff barriers being imposed by the EU if we left and then used that to deregulate and liberalise faster than the EU – erecting tariff barriers in those circumstances would clearly fall foul of WTO rules).
The above post repeats the Eurosceptic lie that Britain is economically hog-tied by its membership of the European Union.
Which, in the spirit of generosity in order to keep our discussion friendly, is misleading. For example, nationalisation can’t be forbidden by the EU because if it were then cities in France and Germany wouldn’t have been allowed to re-nationalise municipal water services.
Just a quick follow-up: I have now joined the small minority that has read “The Economy in 2020” (thanks for the link) and it is much better argued and sourced than is implied in the blog. The ‘people’s QE’ is presented as a possible approach, not a commitment, and the tax evasion/avoidance estimates are at least sourced to outside work (which I have not read). But the points about funding of HMRC and the message delivered by reducing inheritance tax are perfectly valid: nothing in the document deters me from welcoming the contribution to the economic debate that Corbyn’s newfound prominence brings.
The proposals about raising tax or closing the tax gap have, I think, been comprehensively dismantled by Jolyon Maugham QC as being both misleading (in giving the appearance that there’s £120bn of tax which the government could collect if it cared to do so) and wishful thinking. http://waitingfortax.com/2015/08/12/the-tax-gap-redux/
As devastating criticisms go, I have seen stronger.
Applying the label ‘quantitative easing’ to the creation of a national investment bank will obviously be a fail in a term paper but may be a necessary nod to the political realities Corbyn is normally accused of ignoring. As already noted, the sacred cow of central bank independence is becoming harder and harder to justify: I still hae not forgiven Lord King for his pro-austerity statements before the 2010 election. JvR is evidently at one with Corbyn on the issue of austerity, but doesn’t like to admit it.
In fact, to me the only substantive criticism is that the gains to be achieved from increased corporate taxation and a clampdown on tax avoidance are unlikely to be realised. This is probably true but, again as noted by the original blogger, it’s hardly unique to Corbyn. Actually, I would argue that the financing of more government expenditure is really the least of the UK’s problems for the moment, so the concern is to find a figleaf to persuade commentators (not the markets which know better and largely do not care) that the funding plans are ‘responsible’.
JvR’s economics I wouldn’t presume to criticise (well, I would, but not here and now) but it’s clear he isn’t much of a historian.
Looking beyond the clichés about ‘false consciousness’ and dull-coloured cars, it’s worth noting that Foot’s Labour Party was riding high in the opinion polls on a leftist manifesto until the SDP split, handing Thatcher the ’83 election.
It’s also worth noting that British Leyland was not “state-created” but nationalised in 1975 after several years of being run into the ground and close to bankruptcy as a failing private company.
The main sin of Corbynomics appears to ‘undermining the Bank of England’s independence’.
This is very weak. Indpendent BoE presided over biggest crash and longest ever recession. MPC discussed raising rates in September 2008! King brushed away calls for lower rates after Lehmans collapsed with a lecture on ‘moral hazard’!
Think critics of Corbynomics will have to do better than this.
Good article, but with one howler: tax justice is not the same thing as ‘soaking the rich’.
It was a forgone conclusion that Thatcher was to win the 1983 election as she jingoisticly won the Falklands war 12 months previously. Many were surprised the Labour vote held up so much as the SDP and Libs did make an impact. But even in Finchley Thatcher was “down” 1.4%. Her share was 51.1% of the vote. 1987 was were the manifesto killed Labour – nuclear disarmament immediately. In Finchley Thatcher got 53.9% up 2.8%.
Corbyn has to get his nuclear disarmament through the party, which I do not think he will. So, voting for him is reasonably safe. Corbyn has two things going for him that will transform Britain:
1. He wants to implement Land Valuation Taxation. This will greatly remove harmful land speculation, which was instrumental in the 2008 crash, and the higher the tax on the “rental value” the more income and sales taxes can be reduced or eliminated. LVT replaces other taxes and can be the Single Tax.
2. He wants Proportional Representation. The UK has been crying out for this for over 100 years. It will transform British politics. Recall that at her height Thatcher only got 42% of the vote (about one third of the electorate), yet she had unfettered power. Most “never” wanted her there yet she went on a destructive fire sale of British industry, encouraging off-shoring of industry and encouraging the FIRE sector. There were no checks and balances that a PR system would give. Her moves aided in creating the 2008 crash. She started the conveyor belt to destruction. She pressed the button.
Foot supported Thatcher over the Falklands War. Had he not had a large proportion of his party criticising that and (as I believe Corbyn still does) supporting giving the Falklands “back” to Argentina, the war would not have been nearly so big a factor in Labour’s defeat.